FHA 203(k) Loan

Cite this article as:"FHA 203(k) Loan," in The Business Professor, updated April 7, 2020, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/fha-203k-loan/.


FHA 203(k) Loan

An FHA 203(k) loan is a type of mortgage loan that borrowers can take for home renovation and home purchases. The FHA 203(k) loan is government-backed and allows low-income individuals and families to access financing for home repair and purchase. Otherwise called an FHA construction loan, an FHA 203(k) only finances the purchase and renovation or primary residence.

A Little More on What is an FHA 203(k) Loan

Given that an FHA 203(k) loan is a government-insured mortgage, it offers a flexible loan structure to borrowers. In the FHA 203(k) loan program, borrowers can borrow up to $35,000 to purchase a primary residence or upgrade (renovate) the existing one.

The FHA 203(k) loan is accessible by low-income families, especially those living in old and rural communities. With this provision, such families can take a mortgage loan to buy a home or repair a home that will become their primary residence. Typically, lenders are reluctant to offer a mortgage for properties that need major repairs, in many cases, such loan applications are disapproved, thereby denying low-income families and individuals the opportunity to repair or upgrade their homes. The FHA 203(k) loans came as a response to the needs of low-income families in old communities who need financing to obtain a primary residence or renovate an existing one. FHA 203(k) loans are government-backed which includes the cost of repairing a home in the mortgage package, eliminating the need for double mortgage applications by borrowers or homeowners.

Types of 203(k) Loans

The FHA 203(k) loans are strictly available for low-income individuals and families who need financing to make repairs on their primary residence or need to purchase a home as a primary residence. Real estate investors are not eligible for the FHA 203(k) loans. Two types of FHA 203(k) loans exist, these are the streamline 203(k) and standard 203(k).

Streamline 201(k): Minimal Repairs

The streamline 201 (K) is obtained by individuals and families when a home requires minimal repairs in order to upgrade it into a befitting primary residence. The maximum amount that borrowers can obtain for repairs under the streamline 203(k) is $35,000.

Standard 2013(k): Extensive Work

The standard 203(k) offers a mortgage for large scale repairs or extensive work that needs to be done on a home. The minimum amount that borrowers can take under this loan is $5,000. The extensive works that the standard 203 (K) covers include flooring, window and door replacements, plumbing, painting, landscape improvements, energy conservation systems, and. heat and air conditioning systems, bathroom and kitchen renovation, among others.

How Do Lenders Use an FHA 203(k) Loan?

The Federal Housing Administration (FHA) was established to provide reassurance for banks and lending institutions against defaults and foreclosures. FHA was created at a time where there the real estate industry crashed during the Great Depression, this crash witnessed a high rate of foreclosures and defaults. The Federal Housing Administration offered FHA 203(k) loans which are government-insured and serves as an incentive for lending institutions to extend home loans to low and medium-income individuals and families who need to purchase a home as a primary residence or upgrade their homes.

The FHA loan programs also cover individuals with low credit scores or those without credit history who are first-time homebuyer. With this program, borrowers who lenders would normally decline offering loans were able to get home loans. The FHA loan rests on the basis that if a borrower defaults, the FHA would cover the payments, thereby providing reassurance to lenders and financial institutions.

Getting an FHA 203(k) Loan

FHA 203(k) Loans cannot be obtained directly from the Federal Housing Administration. FHA is only a mortgage insurer and not the lender, hence, this federal agency does not interact with borrowers, but with the lenders instead. Low and medium-income individuals and families can obtain FHA 203(k) through their banks, credit union or any other lending institution. It is also important that not all banks, credit unions, and lenders are approved to offer FHA 203(k) loans. Lenders can find a list of approved lenders by searching FHA’s official website.

Pros and Cons of an FHA 203(k) Loan

Given that FHA loans are approved and insured by the government, they offer lower interest rates compared to other mortgage loans. Although interest rate varies from borrower to borrower based on their credit ration or credit history, interests are relatively low. FHA loans can also be obtained by individuals with poor credit ratings and those without any credit history.

The cons of FHA 203(k) loan is that borrowers are required to pay an upfront mortgage insurance premium every month.  Some lenders also charge a supplemental origination fee. Aside from the costs, the FHA 203(k) has a long process with a lot of paperwork to be submitted by a borrower. Applying for the loan is also time-consuming.

References for “FHA 203(k) Loan”


https://www.investopedia.com › Personal Finance › Mortgages





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